Lifestyle

The problemIn 1976, the Alberta government told an Edmonton farmer his private land was to be turned into a park and offered him a pittance for compensation; it was only in court years later that the province was forced to admit it actually wanted his land for a highway—which would have triggered much higher compensation. In Vancouver in 2000, the City told the Canadian Pacific Railway that CPR land was henceforth to be a public space—and that no compensation would ever be paid; six years later, the Supreme Court of Canada endorsed the de facto confiscation.

What do these two cases — one from a private landowner with limited resources and one from a corporation with much deeper pockets — have in common? Both are examples of how government regulation can and does restrict the use of property to such an extent that such restrictions are akin to expropriation. Except that when governments use regulation to seize property, compensation is often small or in most cases, non-existent.

In some cases, that is precisely why governments use regulation: it allows them to avoid paying compensation that would otherwise be due if expropriation statutes were in play. Here’s how it works: the regulation is imposed; the freeze or partial freeze occurs; the devaluation results; little or no compensation is offered.

The remedy from EuropeThis book points the way out of such undesirable policies while also recognizing the reality and desirability of some regulation. The book includes international examples of compensation for what’s known as “regulatory takings” and outlines how countries such as Sweden, Finland, Germany, Holland, Israel, and others treat private property owners much more fairly, providing compensation for regulations that “freeze” one’s property. Stealth Confiscation offers examples of such sensible policy, explains Canada’s historic attachment to property rights, and analyzes recent initiatives for both legislative and constitutional reform.

The essence of debt serfdom is debt rises to compensate for stagnant wages.

I often speak of debt serfdom; here it is, captured in a single chart. The basic dynamics are all here, if you read between the lines:

1. Financialization of the U.S. and global economies diverts income to capital and those benefitting from globalization/ “financial innovation;” income for the top 5% rises spectacularly in real terms even as wages stagnate or decline for the bottom 80%.

3. The dot-com/Internet boom boosted incomes across the board, enabling the bottom 95% to deleverage some of the debt.

4. When the investment/speculation bubble popped, incomes again declined, and households borrowed heavily against their primary asset, the home, via home equity lines of credit (HELOCs), second mortgages, etc.

5. The incomes of the top 5% rose enough that these households could actually reduce their debt (deleverage) even before the housing bubble popped.

The left says yes — income inequality has soared in recent years, and the way to address it (supposedly) is to tax the rich and capital gains at a higher rate. The right says no — that the rich already create more jobs and wealth, because they spend more money, and why (supposedly) should they pay more tax when they already pay far higher figures than lower-income workers?

Paul Krugman made the point yesterday that the tax rate on the top earners during the post-war boom was 91%, seeming to infer that a return to such rates would be good for the economy.

Yet if we want to raise more revenue, historically it doesn’t really seem to matter what the top tax rate is:

Federal revenues have hovered close to 20% of GDP whatever the tax rate on the richest few.

This seems to be because of what is known as the Laffer-Khaldun effect: the higher rates go, the more incentive for tax avoidance and tax evasion.

And while income inequality has risen in recent years, the top-earners share of tax revenue has risen in step:

At current rates, in excess of 2.5 million dollars invested in a balanced portfolio is required to generate 60K income for life.

Last week, the Canadian government announced a reduction in eligibility for the Old Age Security Benefit from age 65 to 67 starting in 2023. This means all Canadians age 54 and younger today will receive less retirement income from the federal government. We should expect more of this to come as pensions worldwide struggle with mounting deficits, thanks to poor investment management and insufficient contribution levels over the past 15 years. Now deficits are compounding thanks to zero-bound interest rates courtesy of central bankers everywhere.

This week one of the largest Canadian pension plans, the Ontario Teachers’ Pension plan, announced a 9.6 billion shortfall in capital needed to fund pension obligations. In response Ontario’s Finance Minister advised that the cash-strapped government is not prepared to increase employer contributions to the teacher’s plan: “We are saying benefits have to be cut”, was his official statement.

This is the inevitable outcome of more than a decade of can-kicking in the pension management area. The demographic cost of the aging boomers was easy to predict and calculate. But the numbers were simply not attractive to those looking to spend their way to prosperity.

The solution of choice was for employees and employers not to increase contributions, but to hire investment managers who promised to make a mountain out of a mole hill. I am reminded of some pension presentations I was asked to give over the past 10 years, where my recommendation was to discard static allocation models, lower equity exposure to control risk and lower return targets to a more realistic level in the 5% range. No pension boards hired our firm after these presentations. All the managers who were happy to promise higher returns got these jobs.

Assumed annual returns of 8%+ were plugged in and everyone hoped for the best. Except 12 years into this secular bear in stocks, investment returns have been under-performing target for more than a decade. The deficits are finally getting too large to overlook. Benefits are likely to be reduced for future recipients, as well as pushing out eligibility triggers.

Yesterday I met with some long-term clients who are members of OMER’s another large Ontario pension plan. After more than 30 years, they are now eligible to retire on full pensions of 60K a year, indexed. I pointed out that these were incredibly valuable assets: at current rates, one would need to have in excess of 2.5 million dollars invested in a balanced portfolio to generate that kind of income for life.

They were surprised as few people understand the math of how much capital it takes to generate livable income today. I assured them that they and their co-workers were very fortunate to have this rare asset in a world where few defined benefits plans still exist. “But I am the only one in my department to still have a pension” she replied. “Remember 5 or 6 years ago when our employer offered us the option of cashing out a lump sum commuted value? Everyone in my office took that option and gave the funds to financial advisors. They all told me I was crazy for not doing it. But they have all lost money and now most have just thousands in their retirement accounts.”

“Even $500,000 today may sound like a lot, but at current yields, 500K will give you a maximum of about 15,000 a year of income” I said. “Thank God you were smart enough not to cash out. “Well”, she smiled, “don’t you remember–you told us not to–we have always taken your advice.”

Sorry for the self-indulgence here, I need it to make this point. This was a highlight of my day. But I also felt sad and frustrated for my clients’ co-workers who had taken the advice of the financial sales force and cashed out their life savings into the peak of yet another stock market bubble in 2006-2008. I had seen many teachers harmed by the same bait in the late 90′s.

Over more than 20 years of advising, I have been a party to many financial decisions that make a huge difference to personal fortunes in the end. Many of these recommendations add value not captured in the annual performance reports of our investment accounts.

Sound financial advice over time is incredibly useful to those who are willing to hear the truth and execute accordingly. But it takes wise, unbiased counsel (those not paid to sell products) and disciplined clients to win this race. It is not always easy to do the right risk management things, but over time I have seen that it is incredibly rewarding for real life families. Once again, I am heartened and grateful for the gift of valuable work.

The Property Time Machine

“I wish I had a time machine”. Those were almost the first words out of Mary’s mouth when I met her. Her husband nodded in agreement. I did too. Who wouldn’t want a time machine?

I could picture myself going back in time and snapping up Microsoft shares before they became a household name…or priceless Van Goghs, back when the painter, himself, couldn’t even sell one of them…or choice properties in prime locations before they boomed.

And Mary’s mind was on property too. She wanted to buy a beach house where she could retire. She considered Panama and Costa Rica 10 years ago, checking out listings and even traveling through both countries to get a feel for them.

But she decided that her retirement was too far in the future. She left her savings in the bank. Ten years back, her savings would have bought her a beach house in Panama or Costa Rica. But her savings haven’t grown very much, while the cost of beach property in Costa Rica and Panama had soared. Today, she’s priced out of both markets.

But she hasn’t given up her dream of a beach home. She doesn’t want to compromise by buying a home a short drive from the beach. She doesn’t want a tiny studio. She wants a spacious house with ocean views in a beachfront community. She’s worried that she won’t find it anywhere on her current budget.

But she can — and she won’t need a time machine. She simply needs to look to Ecuador…

You see, while coastal property prices in both Costa Rica and Panama rose sharply in the last ten years, Ecuador’s coast was a sleeping giant.

A surge of foreign investors triggered the real estate booms in Costa Rica and Panama. Those foreign investors didn’t make it to Ecuador. So property prices on Ecuador’s coast are pegged to the price that local buyers can afford to pay for a home.

So what we’ve seen on Ecuador’s coast is a slow but steady appreciation in prices rather than a rapid spike upwards. Most local buyers pay cash for a second home, too, so the market isn’t frothy and filled with speculators. Ecuadoreans buy beach homes for personal use. Most don’t buy property to flip or as a buy-to-let investment.

And that means you can still buy a home on Ecuador’s coast for less than half of what you’d pay for a similar property in Costa Rica or Panama. And one location offers the most bang for your buck — in terms of value and appreciation potential.

Ecuador boasts hundreds of miles of Pacific coastline. But we’ve found the sweet spot…a section of coast that we think holds the most promise.

I first scouted Ecuador’s coast back in 2008. And when I say scouted…I spent a month on the ground. I explored in off-road vehicles and tiny fishing boats. I burned up boot leather to get the real skinny on off-the-beaten-track locations. I spent time in towns where a foreigner was a novelty. I ate in roadside stops filled with local truckers. I poked around every beach, cove and bay I came across.

And at the end of that month I knew I’d found the sweet spot. (You can see it on this map here; it’s between Canoa and Pedernales.) The problem was; it was really tough to get to.

Since that first trip, I’ve lost track of the number of scouting trips I’ve done on Ecuador’s coast. And each time I’ve gone back, it’s been easier to get to the sweet spot.

Finally, in 2011, this piece of coast opened up. It hit a milestone. And it’s now poised for major growth. Already, we’re seeing more local tourists and buyers, mainly from Quito…and growing interest from foreign buyers looking for a second or retirement home.

In January 2011, a new coastal highway opened. It winds its way from Quito, Ecuador’s capital city, through the mighty Andes Mountains. Driving this route, you can’t help but appreciate the mammoth engineering task involved in carving this road through the mountains.

The new road is smooth and easy to drive. It’s much quicker too, cutting the journey time in half. It now takes 3.5 hours to drive from Quito to this section of coast. That makes this piece of coast the closest beach area to Quito.

That’s an important point. Previously, the closest beach area was a town called Atacames. But Atacames is a 6-7 hour drive from Quito…compared to 3.5 hours to get to Pedernales.

I love this piece of coast. It’s got so much to offer. Travel further south on Ecuador’s coast, and the climate gets very dry, with scrubby vegetation. Travel further north, and it becomes sticky and humid. This place is somewhere in between. It’s not bone-dry or shirt-soaking damp. There’s enough rain to keep the hills and forests green and fresh for most of the year.

It’s unspoiled here too: No high rises, no mega-malls, no sprawl of subdivisions. Lack of access has preserved the natural beauty of this coast. Empty beaches run for miles. Howler monkeys call to each other in the forests covering the hills behind the coast. In the bright blue Pacific, giant whales breed and play with their young. Bright butterflies dance in the ocean breeze. Fishermen land their day’s catch and sell it fresh from the boat for $1 a pound.

This coast has everything that Mary wants. She wants natural beaches, forests and lots of wildlife. She wants year-round warm weather. She’d like a low cost of living and lots of locally-grown produce and fresh seafood. She’s not looking for brand-name coffee houses, fast food chains, or fashion malls. You won’t find any of those on this coast. What you will find are raw beauty and low property prices.

One of the nicest residential communities on this section of coast is Jama Campay.

Jama Campay is a small beachfront community of lots, houses and condos. The development sits on low cliffs overlooking the ocean, with forest-covered hills providing a lush backdrop.

A 20-minute ride from Jama Campay takes you to a town where you can buy groceries and gas, go to the bank, or dine in one of the local restaurants. The restaurants aren’t fancy, but neither are their prices. You can get lunch for as little as $2.

Just south of Jama Campay, there’s a fun town called Canoa. It’s a little Margaritaville with lots of rustic bars, cafes, restaurants and clubs. Its wide beach and good waves attract a young international set of surfers and backpackers.

But Jama Campay contrasts with the party atmosphere in Canoa. It’s tranquil. Most of the buyers are well-heeled locals from Quito. They come here to relax with family and friends. Few rent their homes when they’re not here. They prefer to keep their homes for private use. One owner who is renting is earning $250-$300 a night for their house. There’s a shortage of accommodation on this coast, and that shortage is growing as more tourists visit.

The homes in Jama Campay tick all the right boxes for Mary. They’re a spacious 1800 square feet with an open-plan layout…they offer wide ocean views…and they’re priced at $134,600. You’ll enjoy the wide outside terraces, where you can dine to the sound of the waves…

And (to tick another box on Mary’s wish list) it’s only a few minutes’ walk from your home to the beach…

I’m going to tell you what I told Mary. Go and take a look at this coast. Sometimes a place will tick all the right boxes on paper. It has everything you want. But then when you go there, it doesn’t feel right for you.

The developer of Jama Campay, Francisco del Castillo, knows this. That’s why he runs chill weekends…mini breaks on this coast that let you check it out first-hand and see if it fits.

Francisco’s team will plan a custom chill weekend for you. They’ll meet you at the airport and drive you down to Jama Campay where you’ll spend a few nights. You’ll see the new road up close…stop for breakfast in a cloud forest town that’s famous for bird watching…and reach Jama Campay in time for an afternoon dip…

Francisco’s team will show you Jama Campay, discuss the different types of property available in the community and help you decide if it’s right for you.

Don’t worry, you’ll get plenty of time to relax and soak up the atmosphere…and before you head back to Quito, you’ll enjoy dinner in Canoa, the fun beach town.

Quality of Life (QOL) can be defined in many different ways. Most North Americans think of increased leisure time, early retirement, time to enjoy our hobbies, home ownership and the ability raise a family comfortably. Others want worry free living. That’s probably a bit of a stretch for most of us. This is likely the state of North American and OECD view of QOL. Since 1950 the lifestyle of Canadians and Americans has become increasingly rich and easy.

The rise of unionized labour, pension largesse, top notch medical coverage, cheap products from Asia and the ability of Canadians and Americans to borrow and accumulate debt in an unrestricted mode has meant that there are not many lifestyle amenities out of reach. It has indeed been a great 5 decade party akin to 50 years of Ferris Beuhler’s Day Off! QOL has been sustained by uninhibited borrowing.

However increased QOL is defined differently by citizens in the emerging world (Emergica). In Emergica there is more emphasis on income and jobs that provides enough to attain some of the accoutrements of the modern world. Savings rates are much higher in Emergica. Indians revere gold. You cannot be married without significant gold endowment in India. Gold is considered the way to create and store wealth in India. Chinese citizens are buying gold and silver at breakneck speed in units from single gram cards to kilogram bars. Gold is a quality of life asset in these countries.

Nevertheless, governments everywhere try to stimulate a growing QOL, however defined, in the culture of their country. One look at the domestic reaction to Greece’s forced “austerity” should convince one of this government’s priorities. Greece is once again feeling the heel of Europe’s jackboot. Remember the recent (1990 to 2007) “Flip that House” folly here in the U.S.? The government notion (with a big assist from Wall Street) that we should have a “chicken in every pot” housing policy was supported by both Republican and Democratic administrations. Housing was considered a quality of life asset. Subsequent to August 2007, much of what we have all experienced in North America, particularly the United States, has been fostered by this unsustainable orgy of low interest rates, easy loans, no down/ low down home ownership supported by cement mixer mortgage and investment bankers who rattled off mortgage bonds so quickly that they cannot now be unwound. Welcome to continued Quantitative Easing and “Too Big to Fail!

Across the globe, there are different views of a “good” quality of life. That’s part of the great strength of the democratic way of life in which humanity can strive to be better. My parents simply wanted to own their home free and clear, save for retirement and send their children to University.

But social scientists view lifestyle analytics differently in their efforts to measure and compare any country’s QOL over time (increasing happiness) and with other countries (relative happiness). Australian social scientists focus on immigration as a key driver of increased QOL.

For example here’s how the United Nations Human Development Agency views QOL i. The index is calculated using three sub-indices to construct an HDI index. They are per capita income, health (life expectancy) and education (years of schooling).

The following diagram shows the increase in this index as estimated by the United Nations Human Development Program for a group of OECD countries. Norway sports the highest index value, the U.S. ranks 4th and Canada 6th according to the study.

These time series and graphs imply that the quality of life as measured by the HDI index has increased for these countries over the past 30 years. In 1980 The U.S. sported the second highest index while Canada ranked third (in the world). They now rank 4th and 6th respectively. I think this is what Mark Faber was getting at in his research results that the QOL of the West was falling and likely to fall further relative to other countries.